Month: June 2014

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

Analysis: Sentiment indicators are still frothy, the VIX is at historic lows, and volume is low. The market started to sell off a number of times during the week but buyers stepped in to bring (i.e. manipulate) the market higher. Nevertheless, the market seems very heavy, as if it’s struggling to gain traction. The trend is still up, as reflected in the moving averages, a lagging indicator. MACD turned slightly down from last week. Except for the extreme sentiment indicators, we’re not seeing strong technical signals (yet). Bottom line: The market appears to be moving sideways. Eventually, it will have to choose one side or the other.

Opinion: The market acted odd all week. It sold off almost every day, especially at the open, but reversed direction to end each day with mild losses (or gains). The market seems heavy and sluggish, and is having a hard time rallying. Some veteran traders will tell you this is a sign of a weak market. If you listen to them, they will tell you the market is as dangerous as they’ve ever seen.

As you’ll find out soon, many current money managers have never experienced a bear market. These money managers were either in college or selling real estate during the 2007 bear market, and few experienced 2000, 1987, or 1973. History may not repeat itself, but human nature never changes. It will not be different this time.

There is a strong desire by many financial pundits to focus on good news, even when it’s not good. That includes having guests on financial shows who are perpetually bullish. Some of these guests make the following statements:

If you believe any of the above statements, then your money may be at risk. Sometimes you have to do the opposite of everyone else, and this is one of those times. No matter how bullish the guests and hosts, no matter how they ignore the evidence, no matter how many times they put a positive spin on the numbers, it’s essential that you are objective. It is not easy in this environment. It seems like everyone is bullish.

Nevertheless, each day I see more red flags, and lately, I’m not the only one. Over the weekend, the Bank for International Settlements (BIS), criticized the Fed for its policies, and said that higher interest rates are coming our way. (FYI, this group correctly predicted the 2007 crash.)

In their report, the BIS warned the Fed about being too open about policy, which can make investors feel too “assured.” Here is a quote from the report: “This can encourage further risk-taking, sowing the seeds of an even sharper reaction. Moreover, even if the central bank becomes aware of the forces at work, it may be boxed in, for fear of precipitating exactly the sharp adjustment it is seeking to avoid,” BIS said. “A vicious circle can develop.”

Recently, I’ve noticed that more professionals are publicly criticizing the Fed for refusing to acknowledge inflation. Many are concerned the Fed is “behind the curve” and will be slow to raise interest rates as inflation increases. The Fed talks as if they want to increase inflation. (Be careful what you wish for, because you may get it.)

If I am right about this being a dangerous market, and I believe I am, the market is in treacherous territory. The sky is dark, storm clouds are appearing, and it’s only a matter of time before a thunderstorm (or hurricane) arrives. I am in awe that we have not had a significant correction for so long. Those who study market history know that the longer we go without a correction, the farther the market will drop.

There will be some extremely profitable opportunities in the future, primarily on the short side. This low volatile, sideways market can’t continue indefinitely. When snapping time occurs, and the market finally breaks, I’ll be ready (and I hope you are, too). Meanwhile, it can get boring while you’re waiting for the market to go somewhere. But patience is exactly what is needed to survive.

When the herd finally realizes the market is in trouble, the mad rush out of the exit doors will be spectacular. And that is why it’s essential you prepare for worst-case scenarios now before everyone else wakes up. By then it could be too late.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.

Analysis: The sentiment indicators are still in the exuberant stage, and will remain there until the market snaps. Professional financial writers are the most bullish, while retail investors are more neutral than bullish. I assume many investors will try and get out if the market goes south. The VIX is at historic lows, which reflects extreme complacency. RSI tells us the market is overbought and vulnerable to a pullback. And yet, the market continues to go higher (with a little help from the Fed). The trend is still up (which is why the bulls are so confident), but fewer and fewer stocks are joining the party. There are many danger signals even as the market climbs higher.

Opinion: Imagine how it must have felt like in 1929 when the market went up high and fast, the economy seemed to be on fire, and the financial experts of the day kept predicting the market was unstoppable. And yet, Jesse Livermore saw that fewer and fewer stocks were participating in the rally, and in fact were deteriorating. Livermore kept adding to his short positions, which caused him great financial pain, but he was certain the market was going to snap. Many days, while he waited for the day of reckoning, he went fishing. He said that it’s not hard to be right about the market. The hardest part is having the patience to wait until the market comes back to its senses. When the market finally broke in 1929, first slowly, and then with a huge crash, Livermore made more money than he ever did in his life. Even he was shocked by how fast and far the market went down.

In 2014, we have a market that is being talked higher by the Fed using a variety of tools and programs, some which we know about (low interest rates), and others we don’t know about. Last week, Janet threw a bit more gasoline on the market, and it responded with a 100 point rally (.73%). I found it interesting that the market did not have a strong followup rally. In my opinion, this market is running out of steam, although the Fed is doing everything in its power to keep the party going (with help from high frequency traders and financial writers).

Everything that I know about the market tells me it’s in trouble. Although I cannot predict the time or day when the first break will occur, it’s coming. The bulls have been lulled to believe the market is in a permanent plateau. The few bears that still remain are frustrated that the market seems unstoppable. One of my bearish acquaintances (who is not a professional) angrily said the market could remain levitated for years. Perhaps, I told him, but I don’t think so.

In fact, if you look at the Dow stocks, more and more are slowly turning negative. Like a game of Three-Card Monte, most investors are looking in the wrong place for the money card. Look underneath the hood, not at the “all-time” highs. For your information, the Nasdaq just made a 14-year high. On the other hand, volume is weak, complacency is high, the internals are deteroriating, and the herd is a little too bullish. It takes a tremendous amount of patience to wait until the market snaps. More than likely, the first crack will come out of nowhere. Until then, wait. For me, being primarily in cash is the most prudent place to be. Keep in mind that most people, including most pros, disagree with me. They are all in.

This is a market that can lull you to sleep as it slowly climbs higher. It is deceptively dangerous because few realize their portfolios are vulnerable. The higher and longer the market climbs, the more risky it becomes. Margin will increase, the Fed will seem in control of the market, inflation will slowly creep higher, and the bubble will grow bigger. Unfortunately for bears, this could go on for a while longer, so be prepared to wait.

Bottom line: This is not going to end well.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Analysis: Last week, sentiment indicators were so extreme (overbought) a pullback was inevitable. Most sentiment indicators are still in the stratosphere, although they may come back to earth depending on geopolitical events. On the technical side, the trend is still up but there are signs this bull market is getting exhausted. Bullish investors believe the Fed will once again propel the market higher this week. They could be right because Janet should have soothing words on Wednesday (the Fed meeting). On the other hand, Iraq and oil could disrupt the market. This week, it’s a tossup what will happen as the signals are mixed.

Opinion: The market attempted to make another all-time high but took a hit as geopolitical events (i.e. Iraq) took center stage. Oil prices are rising and the world is watching to see what happens next. It’s a dangerous world and a dangerous market.

As I’ve written in a series of MarketWatch articles, the stock market is susceptible to a major pullback or correction. Because the market has gone up so high and so slowly, most investors believe it is unstoppable. The most bullish believe in the power of the Fed to save them by coming up with new tools and programs. The longer the Fed interferes, however, the more dangerous the market becomes.

I know this is hard for some bullish investors to believe but markets do not go up forever. Talking the market up higher at these levels (or tampering with the tapering) will cause unexpected consequences in the future. Instead of a correction, something far worse and unexpected could occur.

If you are bullish on the economy and the stock market, you don’t want to hear doom-and-gloom predictions. For five years, ignoring worst-case scenarios was a wise move as many of the most dramatic predictions were incorrect. Unfortunately, this is also why so many investors are so complacent. Many really believe the Fed (or their fund manager) will protect them from danger. When the inevitable correction comes, investors will be slow to react, or worse, think their stocks will bounce back quickly. That belief (that your stocks will come back to even) will damage many portfolios in the future.

In my opinion, the risk of the current market far outweighs the potential reward. Keep in mind that most people do not agree with me and are all in. After all, with the Fed’s help, this market bubble could continue to get even bigger. It could be weeks or months, but a monster correction (and bear market) is unavoidable.

As for me, I am not only out of this market in cash but also building short positions with inverse ETFs and some options. (Shorting is only for experienced investors who can manage risk. If you’re not experienced, cash is a comfortable place to be before a market crisis.)

Being patient and disciplined is the way to survive and thrive in this market. As the red flags and warning signs increase, prudent investors are taking profits or moving to the sidelines. To repeat, the downside risks far outweigh the potential gains. I might be wrong in the short term, but this market hasn’t had a correction of over 10 percent in more than two years. Complacent investors may think that’s normal, but it’s not. The clock is ticking, and it’s best to run for cover before the market comes back to its senses. Many investors are playing with fire right now, and most surprising, they do not even know it.

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

Analysis: What a difference a week makes! In one week, the sentiment indicators went from mildly exuberant to extremely exuberant (i.e. that is a bearish signal). Remember that it’s possible for sentiment to remain overbought for longer time periods, but we’re definitely in the danger zone. If you look at the market trend, however, we’re going up, up, and away, which is fooling many inexperienced investors (and a few pros, too), who think they are looking at a healthy bull market. I know I’m in the minority but I must disagree. The uptrend is your friend in a strong bull market, but we also have low volume (danger sign), obscenely high margin rates, and fewer and fewer stocks making new highs. Investors who do not study market history or are greedy will buy blindly at these sky-high prices, and that is happening now. Bottom line: Strange things are occurring in the market, which tells me that something will crack (if you have the patience to wait weeks or months).

Opinion: As I mentioned last week, I am still getting emails from some readers who believe my advice to move to cash is “dangerous” and “irresponsible.” Others are angry that I would dare suggest that the bull market might end. A few sent me emails bragging about how smart they have been, and that I am “crazy” for not buying stocks right now as the market makes all time highs.

A note to those who think they are stock-picking geniuses: When a market is rising on low volume, when the number of stocks making new highs is shrinking, when the sentiment indicators are flashing warning signs, when too many people think the market will never go down, GET OUT. (I have to ask: What happened to the buy low and sell high strategy? If you follow this idea, you will not be buying stocks at these lofty levels).

I also do not understand why it’s “dangerous and irresponsible” to warn investors that the market is overheating. If I’m right, I have saved them money. If I’m temporarily wrong, they lost nothing but a few percentage points. They can always join the gravy train later when prices come back to earth. On the other hand, if you believe the market will go up indefinitely and the Fed will prevent a bear market, I have some tulip bulbs I’d like to sell you at outrageously expensive prices.

All the indicators I look at (including some proprietary ones that I don’t publish) are signaling trouble ahead. Most people do not have the patience and discipline to wait for the first snap (i.e. inflection or pivot point). When it comes, it will catch most investors, including many pros, by surprise. I believe it’s coming sooner rather than later, but so far it’s taking longer than I anticipated. I have the patience to wait, however, and I’m comfortable making 0 percent (or in the red with my short positions) as storm clouds appear.

Bottom line: Only you can decide how much risk you are willing to take. If you strongly disagree with what I wrote above, do what you think is best, and ignore my warnings. The next few weeks could be very interesting. As for me, I am looking to see if the sentiment indicators go even higher this week (that will happen if the market keeps rising).

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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